Sunday, June 5, 2011

It will be several months until a key consumer-protection provision of Hawaii's overhauled foreclosure law can be used. But there has been one immediate impact: a freeze on many new foreclosures and auctions of homes owned by occupants.

The new law, which took effect earlier this month, did not prescribe a foreclosure moratorium, but the law prohibits lenders from holding nonjudicial foreclosure auctions until borrowers have an opportunity to participate in a dispute resolution program.

The dispute resolution program, a pivotal piece of the law, is slated to begin operating by Oct. 1. So in effect, existing foreclosure cases between owner-occupants and lenders are on hold for up to five months.

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The law also is hindering lenders from starting some new foreclosure cases until the state is ready with the dispute resolution program. This could postpone hundreds of foreclosure filings over the next few months.

The freeze stands to affect many, but not all, auctions and new foreclosure cases. Only nonjudicial foreclosures against homeowners who have lived in their homes for a minimum 200 consecutive days are eligible to participate in the dispute resolution program.

Excluded are judicial foreclosure cases, which represent a small minority of home foreclosures, and cases involving commercial property, time shares and homes owned by investors. Foreclosures initiated by condominium or homeowner associations are also exempt from this aspect of the law.

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Another part of the law allows borrowers to convert a nonjudicial foreclosure to a judicial foreclosure overseen by a judge. Industry observers say it will be interesting to see how use of the law plays out — especially regarding how many borrowers use the dispute-resolution tool and whether lenders avoid it by turning to judicial foreclosure.

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